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For Chinese Deal Makers,
It's a Bumpy Road Ahead

By

James T. Areddy

Dec. 28, 2012 6:13 p.m. ET

Deal-making by China's giant state-owned companies is facing more challenges from foreign governments. Privately owned Chinese companies have typically escaped the spotlight, but governments are starting to question these buyers as well.

These private companies have taken on bigger roles in natural-resources deals as governments push harder lines against state-owned companies. This month, Canada, in approving the takeover of energy producer
Nexen Inc.
by China's state-owned
Cnooc.
, all but ruled out the future purchase of controlling stakes in energy companies by foreign government-controlled suitors.

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For the first 11 months of this year, private Chinese investors made 29 cross-border acquisitions worth $2.13 billion in the oil, gas, metals and mining sectors, according to Thomson Reuters figures. That is down from the boom year of 2011, when $4.91 billion worth of deals were done, but up from the late 2000s, when they averaged around $1 billion annually.

Chinese officials often say they believe that government-owned companies will face U.S. opposition on national-security grounds when making investments in the U.S. Among those who have made such comments is
Li Ruogu,
chairman of Export-Import Bank of China, which has earmarked $1.5 billion to fund Sichuan Hanlong Group's international expansion.

Government scrutiny of the Eureka, Nev., project—to mine the metal molybdenum—has centered on environmental issues, like water usage, not the nationality or background of its Chinese backer, investor
Liu Han's
Hanlong, according to the publicly available documents explaining the government's concerns.

Pointing to private enterprises like Chinese telecom equipment maker Huawei Technologies Co., a U.S. congressional report issued last month urged caution: "Even those companies that are majority privately held are likely to be influenced or controlled by the government." Huawei has said it is a private, profit-oriented company and isn't influenced by China's government. Huawei spokesman
Scott Sykes
said this month, "We're a commercial company; our interests are 100% commercial."

Bruce J. Dickson,
a professor at George Washington University, dubs Chinese entrepreneurs as "red capitalists" to reflect the often close links between officialdom and the private sector. "In the Chinese context, even for a private firm, there's a level of [government] cooperation that most Americans find strange," he says.

President Barack Obama in September cited national security concerns in blocking investment into an Oregon wind farm by two Chinese nationals. Now, attention is turning toward Wanxiang Group Corp., a private Chinese auto-parts juggernaut with a big office in Chicago, that won a bankruptcy-court auction for
A123 Systems Inc.,
a battery maker that had received U.S. government funding.

That deal is under review by the Committee on Foreign Investment in the United States, a government body that reviews national security implications of foreign purchases of U.S. companies. CFIUS has asked for additional time to review the deal.

Republican Sens. Chuck Grassley of Iowa and
John Thune
of South Dakota have been critical of the sale of A123's operations to Wanxiang, even after its defense contracts were separated out during the bankruptcy sale. The senators have expressed concern that battery technology developed in the U.S., with government money, would be owned by a Chinese company. Wanxiang has said it would keep jobs in the U.S. and won't buy the battery maker's U.S. government-related operations.